Q1 2023 Sitio Royalties Corp Earnings Call
Okay.
Good morning, and thank you for attending CTO royalties first quarter 2023 earnings call. My name is Felicia and I'll be your operator today.
All lines will be muted during the presentation portion of the call with an opportunity to questions and answers at the end.
I would now like to pass the conference over to your host Ross Wong Vice President of Finance and Investor Relations.
You May proceed.
Thanks, operator, and good morning, everyone.
Welcome to city of royalties first quarter 2023 earnings call.
Don't already have a copy of our recent press release.
An investor presentation.
Visit our website at Www Dot city on Dot com.
Find them at our Investor Relations section.
With me today to discuss our first quarter of 2023 financial and operating results as Chris <unk> our.
Our Chief Executive Officer, <unk>, <unk>, our Chief Financial Officer, and other members of our executive leadership team.
Before we start I would like to remind you that our discussion today may contain forward looking statements and non-GAAP measures.
Please refer to our earnings press release Investor presentation, and publicly filed documents for additional information regarding such forward looking statements and non-GAAP measures and with that I will turn the call over to Chris.
Thanks, Ross good morning, everyone and thank you for joining <unk> first quarter 2023 earnings call.
There is one word that captures the theme from this quarter uneventful for the first time in two years, we did not announce or close any acquisitions during the quarter and for the first time since becoming public there are no pro formats or partial period results in our reported financials.
Integration of the Brigham assets and personnel is complete but nothing unexpected to note.
During the first quarter production associated with such as assets averaged 34440 barrels of oil equivalent per day, which is comparable to the 34424 Boe's per day produced from these assets in the fourth quarter of 2022.
First quarter production volumes were in line with our expectations and we are reaffirming full year 2023 production guidance range of 34 to 37000 Boe per day.
We estimate that in the first quarter there were seven three new net well that started producing.
Acreage more than 95% of which are in the Permian basin.
These new net wells represent cynthia's interests and wells publicly known to have come online during the quarter.
What city of interest and net well still identified of spuds and public data sources, but are estimated to have started producing during the quarter based on market intelligence and our forecasting methodology.
As of March 31, we had $42 eight net line of sight wells, which implies steady operator activity over the next 12 to 15 months on our assets.
Particularly relative to the cumulative total of 141, three net wells that have come online since the beginning of 2019.
The first quarter of 2023 demonstrated quite different M&A dynamics in the past three years during the first quarter, we evaluated multiple acquisition totaling approximately 50000 net royalty acres in aggregate.
But we are unable to find any opportunities that met our returns criteria.
Buyers and sellers are still transacting, but a different underwriting assumptions and return thresholds.
We remain focused on achieving a minimum of mid teen unlevered return using strip pricing and future development assumption aligned with actual operator behaviors.
I will provide you with one recent example of a private buyer and private seller the market clearing purchase price. In this example was approximately two times the price that fits you could have paid using our returns parameters. The only way we could have justified paying the same purchase price would have been to either assume a near term production profile of four times.
The five times, our base case production assumptions or an average oil price of approximately $140 per barrel in perpetuity using our production assumptions.
In this example, paying the market clearing purchase price would have resulted in mid single digit returns for our shareholders, which clearly does not meet our hurdle rate.
We believe attractive consolidation opportunities exist with mineral owners, we know and have been pursuing for years and we will continue to be disciplined and good stewards of capital now turning to some key financial metrics for the quarter overall, our financials came in as expected and were within the range of our full year 2023 guidance metrics with the exception.
<unk> of our implied cash tax rate, which I will describe in more detail later.
Our average hedged realized price per BOE for the first quarter was $48 87, which.
Which was $8 61, or 15% below the fourth quarter of 2022.
And we reported adjusted EBITDA of $140 million and discretionary cash flow of $120 million.
First quarter cash G&A was $6 $1 million or $2 $2 million increase relative to <unk> 2022. Since this was the first full quarter with former Brigham employees on the city of payroll. However, we achieved a significant milestone with <unk> 23 cash G&A of $1 97 per Boe.
The lowest ever in <unk> history, and the first quarter in which cash G&A per BOE has been below $2.
Another important point on the G&A topic is the magnitude of the absolute G&A savings that have been achieved through the 2022 combination of desert peak and Falcon conform CTO and Citi is a merger with Brigham.
Add up the cash G&A from the first quarter of last year. When all three of those companies were independent of each other.
Total cash G&A was $11 3 million compare that to our first quarter 2023 cash G&A and you can see that we have reduced the absolute amount of cash G&A from all three entities by 46%. This is a great illustration of the scalability of our business model and the value to be created for our shareholders.
Consolidated in this highly fragmented industry.
Due to timing differences cash taxes in our financials can be somewhat confusing relative to our guide. So I wanted to go over this in more detail.
<unk> twenty-three cash taxes reported in our financials represent the cash taxes paid in the first quarter not the taxes payable related to taxable income for the first quarter.
In January we made a cash tax payment of $550000 for income taxes related to taxable income in the fourth quarter of 2022.
This was the only cash tax paid during <unk> 23, so the implied reported cash tax rate is 1% for the first quarter.
Similarly in April we made a cash tax payment of $5 $9 million for income taxes related to taxable income in the first quarter of 2023. So the first quarter 2023 estimated cash tax rate would have been 11% without timing differences. In addition to the $5 $9 million of cash taxes that was paid in April we plan to make.
Other cash tax payments during the second quarter related to income taxes due for <unk> 2023, which we expect to be approximately 11% to 13% of second quarter pre tax income.
Our board declared a dividend of <unk> 50 per share using a payout ratio of 65% for the first quarter of 2023, which will be paid on may 31 to record holders at the close of business on may 19th.
This dividend is down by <unk> 10 per share relative to the dividend in the fourth quarter of 2022. So I wanted to provide some details to help explain the variance.
Lower commodity prices decreased the dividend by roughly 11% lower production volumes driven by two fewer days in the quarter decreased the dividend by another $1 six and the combination of lower lease bonus higher cash G&A and higher cash interest decreased the dividend by $1 eight.
These decreases were partially offset by an increased dividend of $2 six due to lower cash taxes, and the combination of lower severance and AD valorem taxes, lower gathering and transportation expenses and higher realized hedging gains which added another 1.8 to the dividend.
Our first quarter dividend of <unk> 50 per share benefited from paying cash taxes related to the first quarter in April .
All income taxes had been paid in the quarters that they were related to our first quarter dividend would have been approximately 47 per share.
Moving on to the balance sheet at the end of March we made another amortization payment at par of 11, two $5 million on our unsecured notes, bringing the remaining amount outstanding principal to $427 $5 million.
We also paid down our credit facility balance by $23 million during the first quarter on April 28, our lenders reaffirmed our $750 million borrowing base and as of May 5th 2023, we had reduced the outstanding balance on our credit facility to $441 million, which is an additional $46 million reduction since the <unk>.
End of the first quarter, providing liquidity of approximately $315 million, including $6 million of cash and $309 million of remaining availability on our credit facility.
I want to remind shareholders that we filed our 2023 proxy statement on March 31, and that our virtual annual Investor meeting is scheduled for Tuesday May 16, 2023 at 11, a M central time, whether or not you plan to attend the annual meeting. It is important that your shares be represented so I highly encourage all shareholders to vote I'm proud.
The differentiated business that we have built and thank the proxy statement does a good job highlighting the accomplishments of the company and our best in class governance model, which provides strong alignment between the board management team and shareholders to drive long term value.
That concludes my prepared remarks, operator, please open up the call for questions.
Thank you we will now begin the question and answer session.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you'd like to remove that question. Please press star followed by <unk>.
Again to ask a question followed by one.
We have our first question from Tim Robertson from Keybanc capital markets. Please go ahead, Sir your line is now open.
Good morning, everybody. Thank you for taking my question first question I had is on the payout ratio you paid out 65% again.
Believe that the.
Sort of a near term target given work on the balance sheet I was wondering Chris if you could talk from you see this as CEO or as a member of the board.
How folks are thinking about intensity.
Former repayment.
Our repurchases being considered and.
What level of leverage or debt reduction would cause you to reconsider that 65% payout ratio.
Hey, good morning, Tim Thanks for the questions.
As a board we do talk about repurchases as I mentioned last quarter, though unfortunately were a bit hamstrung by the unsecured notes that are in place right now that have a limitation on what we can do in terms of return of capital to shareholders.
As a team we've been prioritizing that dividend, we are committed to paying out 65% of discretionary cash flow in the form of a dividend and we don't want to cannibalize any of that for buybacks right. Now I think when the time comes when its appropriate to refinance those unsecured notes and we put a different structure in place that allows for buybacks.
Become a more vibrant conversation and I think youll see us.
Put something in place at that time.
In terms of your second question the.
Sort of metrics that would that would allow us to do that I think theres two things it's wanted.
The company size and then two is as you mentioned the leverage in our company size as we think about them as we get larger and that 35% retained cash flow becomes a larger number.
And then second when the the leverage starts to drift down towards that target. We have for long term leverage of one times or less.
When we start to get really interested in returning more capital than the 65% were already committed to returning to shareholders, we'd love to be in a position to do that but unfortunately with the notes we have today, we're just not.
Okay. So we should look for that potential refinancing is a.
First step.
The other changes okay.
Correct.
I appreciate that color and then just final one on the M&A comment I appreciate them in your prepared statements and it's pretty clear you are trying to get a message out.
The actual release.
Or are you trying to get a little more color are you sort of frustrated.
Do you think the market is going to kind of normalize as maybe some of this.
Capital drives up or how do you see the landscape playing out or how do you hope it kind of plays out over the next year or two to allow you to get more scale.
Yes, I wouldn't describe us as frustrated I think different people have different underwriting discipline and requirements and different cost of capital and so there's different drivers for everybody. So I wouldn't describe it as frustrated.
We're going to just focus on what we do and we've seen this before we saw it in 2021, when we were trying to make a lot of acquisitions in the sellers weren't willing to transact in.
We just.
We kept at it and kept those relationships warm and when the timing lined up and we were able to act. We did in 2021 and 2022. It just feels like this we're in a period here, where it's going to be a bit more challenging to reach.
Our bid ask that that makes sense for our shareholders. We're.
We're making some progress but.
Clearly nothing in the first quarter, and we're pretty deep into the second quarter, right now and haven't announced anything yet so.
I think it is going to be one of those years, where it's going to be a bit lumpy realm.
Relative to the past couple of years.
Okay. Thanks for the comments.
Yes.
The next question, we have comes from TJ Schultz from RBC capital market.
Please go ahead.
Okay.
Hey, good morning.
I guess first on the on the 50000 and our as you looked at where you focused.
And then I guess just from a commodity perspective have lower natural gas prices changed at all are a focus for you on where you want to transact or the conversations with sellers.
Let's leave it there.
Thanks T J good morning, so the bulk of what we've looked at in the first quarter was in the Permian Basin. We did look at a couple of things in the DJ Basin, and then one or two things that were more diversified.
We really haven't looked at anything Thats, just purely gas focus meaning anything in the haynesville or anything in Appalachia.
But.
They may come but.
We found we have just a bit of a.
More localized knowledge and skill sets in areas, where we currently have assets and so when we look at things in the Permian and DJ We feel like we are we have a better grasp on the underwriting and candidly, that's where we feel like there is the most remaining inventory thats economic today and so for us <unk>.
These minerals and not having to deploy additional capital for additional production in the future. There is a greatest potential for that in the Permian basin and the DJ basin relative to some of these other places.
I don't think that the gas price softness of the past six months plus has really impacted us in terms of M&A or in terms of seller mindset really the.
Natural gas is a bit of a byproduct in the Permian and people don't get very anchored on gas prices. When you think about monetizing assets. So it hasnt really played a role there. It has played a role I think in some of the transactions we've been watching not not evaluating ourselves, but we've seen some transactions that had been pulled or had trouble getting financing and other purely.
Gas stations.
Okay makes sense and then we've seen some.
Recent deals get done with the mix of stock and cash when you are looking at deals how you're considering.
The financing mix and how high are you willing to take that leverage to transact on M&A. Thanks.
So we do consider different consideration mixes.
It's really driven by the sellers and what they are open to taking in terms of consideration.
So it's not really our decision to dictate we can express a preference, but ultimately if the seller needs or wants one form of consideration that's going to drive the conversation.
We are open to using the stock, but it has to be accretive just like I would have to be accretive in a cast situations, but we we.
We've used stock in the past for the Brigham transactions often.
Rockbridge source so the bulk of what we've done in the past has been for stock.
And we're willing to do it again, but it just has to meet those those accretion metrics that we've used in the past.
Okay. Thank you.
Yeah.
The next question we have comes from John Ennis from Stifel. Please go ahead.
Hey, good morning, all and thanks for taking my questions for my first question I wanted to focus on the bigger picture.
Question for the Permian and activity within the Permian.
Where do you assume strip pricing do you think we've seen peak activity for at least the immediate term given that private generally have west quality inventory depth and are more likely exposed to weaker gas pricing.
I think youre seeing continued disciplined by operators. So I think the basin certainly is capable of running at higher activity levels, but were assuming current commodity prices current capital discipline. Then, yes, I think we're sort of steady state I think that's what our guidance suggests in terms of volumes.
For our company.
And if you look at our footprint.
If you look at just gross DSO you acreage within our footprint. It covers about one third of the entire Permian basin.
So when you look at our production volume cadence it really reflects that of the broader basin.
So with.
With the guidance, we put out there it doesn't suggest anything beyond the single digit growth, which is what we'd expect for operators. At this time I do think that there are private operators that do have a lot of tier one remaining inventory I look at folks like endeavor and southwest in newborn and others that are really fantastic.
Assets I think some of the later stage private equity backed companies that are looking to sell maybe trying to.
And tried to ramp up production ahead of a sale so they could.
Have some some better metrics for the buyers and make it a more appealing asset for buyers that may be what you're referring to but there are still a lot of private that do have a lot of remaining tier one inventory.
Makes sense.
For my follow up.
In reference to slide had been where you highlight the synergies achieved to date from your past transactions can you comment on whether there is still more runway to achieving further synergies or have the lion's share of those gains already been realized.
So in terms of the assets we have today I think there are.
Opportunities for additional synergies and we talked a little bit about it on last quarter's call we've had some.
Third party vendors that we've worked with data providers that are trying to gouge us on pricing and they.
They have not been really rational with respect with respect to how they're approaching pricing and so we're looking for alternatives and some things just doing things on a proprietary basis that will eliminate those costs altogether and so we're making some modest investments this year as our as we look to just eliminate those line items I wouldn't look at those.
Multiple millions of dollars in terms of savings, but they matter and they're in perpetuity. So there are investments, we make today and benefit from for the rest of the company's lives. So we're excited about those we get excited about.
Our data in ways to access it and work with it so.
It is important to us and the real focus for this year in terms of personnel. We are still investing in people, we find ways that.
Even even adding people can add efficiencies so.
We're looking at some of those alternatives as well so I think the bigger gains to come from further consolidation, though I think as you see us continue to add assets and not have the scale the head count linearly with the asset growth.
What are you going to see additional cost savings on a dollar per Boe basis, and on an absolute dollar basis.
Terrific. Thanks, again for taking my questions.
Thank you.
The next question we have comes from Noel Parks from Tuohy Brothers. Please go ahead.
Hi, good morning.
Good morning.
Just a couple of things.
The first one about the Ah <unk>.
The acquisition path that you've.
Brought along with it.
Rhythm there.
Biggest and most recent.
What hurdles would a new entrant into the royalties market.
Have to overcome in order to attempt to follow your strategy or our Medicare strategy realistically today.
Hi.
So.
One would be.
Finding high quality opportunities like we have in the past two would be access to sufficient capital to replicate what we've done but I think one of the bigger challenges is candidly the people and systems that we built and that's very difficult to replicate.
From the outside looking in it can appear that the minerals business is a very easy one.
Got to manage it.
Optimally it requires the right people and the right systems to really extract the most value for shareholders and that's taken us quite a while to build and we're still investing everyday in that and I think thats, where we have a real advantage over anybody just just starting today.
Okay.
Great Thanks and.
If you look at the different basins.
You know with.
We've had this sort of thing.
Early steady oil environment now for over a year, mostly 70 plus for W. P. Carey and then tremendous volatility and Nat gas and I.
I Wonder as you look at the at.
At the various basins.
It seems like some of them are.
Sure.
At different stages of lifecycle, I guess I don't know if I'd call it consolidation, but like on a land.
Management basis, there is some basins, where there's a lot of trading of interest non operated interests.
Trying to block up acreage and so forth and.
I assume that situations like that might be opportunities might jar, some things loose and then theres going to be other basins, where they are just not in that and that sort of stage right now.
I'm wondering if on a sort of a land management.
Basis, if you're noticing any particular trends with the <unk>.
Based on.
Okay.
The same observation you do about the relative maturity of different basins. It feels like places like the Eagle Ford and the Williston have a lot less remaining.
Organic growth.
And then maybe more of a maintenance mode or in slight decline.
And that leads to a different opportunity set for operators in terms of who is going to be the ultimate holder of those assets longer term.
No for the mineral owners for us as we look at these opportunities we like a balance of of of current production plus remaining development potential and so when we look at opportunities that were let's say just eagle Ford or just Williston basin compared to something that's that's.
<unk> in the Permian or just in the DJ Basin, it's a harder comparison for us to.
To make the same sort of underwriting assumptions about future growth just because we know that theres less remaining running room in those places.
Why you see us continue to come back to places like the Permian and the DJ.
Sure Fair enough okay. Thanks, a lot.
Thank you.
As a reminder, ladies and gentlemen can you further question. Please press star followed by one on your telephone keypad.
We have no further questions registered at this concludes today's call. Thank you all for attending you may now disconnect your lines.
Yeah.
Yes.
Okay.
Thank you.
Okay.
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Okay.
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Okay.